Financial Markets and Economic Fluctuations Questions with Answers | ECON 423, Exams of Financial Market

Download Financial Markets and Economic Fluctuations Questions with Answers | ECON 423 and more Exams Financial Market in PDF only on Docsity! Econ 423: Questions from Previous Versions of Exam 2 1. Creative responses in mortgage markets to the stagflation of the 1970s and the resulting increases in nominal interest rates did not include increased emphasis on: (a) assumable loans. (b) balloon payments. (c) adjustable rate mortgages. (d) shorter terms for conventional mortgages. (e) incentives to securitize disparate mortgages so that an overarching reasonably homogeneous and liquid security would be marketed. 2. For the actual money multiplier to equal the potential money multiplier: (a) banks must be fully loaned up and no currency can be held outside the system. (b) discount lending by the Fed must be consistent with bank’s desires to hold excess reserves, given the federal funds rate. (c) the legal reserve requirement ratio cannot exceed the excess reserve ration that banks would hold if there were no legal minimum on banks’ holdings of reserves. (d) the monetary base must equal the sum of legally required reserves and banks’ excess reserves. 3. Most of the M1 money supply has been most directly created by: (a) bank loans. (b) discount loans by the Fed. (c) federal deficits. (d) open market operations by the Fed. (e) retained surpluses from the balance of payments. 4. Between roughly 1870 and 1890, persistent declines in the price level and the average nominal wage rate accompanied substantial real growth in the United States. This is evidence that: (a) the shift from a gold standard to “greenbacks” created consistent deflationary pressure on the dollar. (b) potential GDP in the United States grew faster than did the supply of gold, and consequently, the supply of money. (c) persistent federal government budget deficits reduce Aggregate Demand. (d) Aggregate Demand expanded faster than Aggregate Supply because of significant immigration into the United States. (e) stagflation occurs when Aggregate Supply grows faster than Aggregate Demand. 5. If Professor Orthodox deposited a check from the Federal Reserve Bank of Dallas received to cover travel expenses while doing research as part of a consulting contract, these transactions would not result in an increase in the aggregate measured: (a) federal budget deficit. (b) reserves in the banking system. (c) simple [M1} money supply. (d) liabilities of commercial banks. (e) monetary base. 6. Across your lifetime, your interest costs for mortgages are likely to be lowest on homes you buy as you experience increases in your income and changes in your employment, if you: (a) avoid interest rate risk by always borrowing with a conventional mortgage. (b) buy homes only if the sellers already have mortgages outstanding that permit you to assume their loans. (c) accept interest rate risk by taking out a adjustable rate mortgages [ARMs]. (d) pay off your balloon mortgages and refinance your debt whenever the market interest rate declines. 7. If domestic saving and investment are constant, rising federal budget deficits yield: (a) lower interest rates. (b) higher tax rates. (c) growing trade deficits. (d) reduced public debt. 8. Media headlines that “the Fed lowered the interest rate” mean that the Federal Reserve System’s Board of Governors has announced a reduction in the: (a) discount rate (d). (b) target rate for interest charged in the federal funds market. (c) legal maximum rate that can be charged on credit cards. (d) interest rates paid on US Treasury bonds. (e) target rate of price inflation. 1 9. Reasons why many if not most Americans now handle much less cash relative to their incomes than was typical in earlier times do not include reduced transaction costs associated with: (a) the availability of automatic teller machines (ATMs). (b) the ability to make electronic deposits of paychecks. (c) using credit cards. (d) involuntary private sector transfer payments. (e) on-line banking. 10. Currency in circulation + legal reserves in banks equals: (a) the monetary base. (b) "low-powered money." (c) demand deposits. (d) checkable accounts + time deposits. (e) quasi-money. 11. Commercial paper is unlike other money market instruments in that trading in the transactions in the secondary markets are rare. Major reasons are that individual commercial banks specialize in making short-term loans [commercial paper] to specific individual corporations because: (a) they are better able to exploit the advantages of insider information, and they gain insight into particular industry dynamics through a “learning-by-doing” process. (b) this facilitates customization of the loan instruments, and it also facilitates dealing with potential abuses of asymmetric information. (c) the “spread” is greater on commercial loans than it is with such capital market instruments as Treasury bills or corporate debentures. (d) individual corporate borrowers are more likely to keep their demand and time deposits in the banks that are willing to lend them short-term funds. 12. If the interest rate and expected rate of return are both around 12% annually, rough calculation suggests that a financial investor’s offer for a house expected to rent perpetually for $1,000 per month would be about: (a) $240,000. (b) $144,000. (c) $106,000. (d) $72,000. (e) $12,000. 13. The theory of bureaucratic behavior may explain why the Fed: (a) reports all activities directly to the president. (b) engages in ‘whistle blowing’ activities when unhappy with the chairman. (c) constantly lies to the Senate to avoid interference. (d) attempts to obscure its activities to avoid congressional interference. 14. Assuming identical maturity, the money market securities that tend to yield the lowest interest rates are: (a) U.S. Treasury bills. (b) bankers acceptances. (c) negotiable certificates of deposit. (d) U.S. Treasury bonds. (e) commercial paper. 15. The tax deductibility of mortgage interest tends to cause: (a) heavier reliance on debt to finance purchases of family homes. (b) overinvestment in family homes, from the perspective of the overall economy, relative to other forms of economic investment. (c) significant reliance on second mortgages to finance non-home expenditures. (d) tax structures to be slightly relatively less progressive than they otherwise would be. (e) all of the above. 16. Of the following financial instruments, the one most like a bond that is an annuity or perpetuity is: (a) preferred stock. (b) a convertible corporate debenture. (c) non-convertible revenue bonds. (d) common stock issued at the time of the firm’s IPO. 17. If the federal government’s outlays were $3500 billion, while taxes it collected were $3600 billion, then there would necessarily be a $100 billion decrease in the: (a) U.S. international trade surplus. (b) monetary base. (c) privately-held public debt. (d) sum of the monetary base and privately-held public debt. (e) U.S. international payments deficit. 18. Bond prices would fall automatically if there was an increase in: (a) levels of optimism among investors in economic capital. (b) rates of real estate speculation. (c) present values estimated for future income from the bonds. (d) growth rates of national income. (e) interest rates. 2 40. The money market is: (a) more efficient than the banking industry in acquiring and digesting potentially adverse information about securities. (b) the major institution mediating the asymmetric information problem between saver-lenders and borrower-spenders. (c) subject to fewer regulations and lower transaction costs than is the banking industry. (d) the major source of both short- and long-term funding for non-profit corporations. (e) most actively used by mutual funds and pension funds that focus on long term financial investments. 41. Negotiable certificates of deposit: (a) are bearer instruments because their holders receive the principal and the interest earned at maturity. (b) typically have a maturity of from one to four years. (c) are usually denominated in $100,000 increments. (d) are high interest instruments because interest fluctuations and default risk are crucial influences on the rate of return ultimately realized at maturity. 42. Loophole mining refers to financial innovation designed to (a) hide transactions from the IRS. (b) conceal transactions from the SEC. (c) avoid the effects of restrictive regulations. (d) increase the independence of financial managers from their stockholders. (e) None of the above. 43. A call provision in a corporate bond is more likely to be exercised if (a) interest rates rise. (b) inflation increases. (c) the firm decides to privatize. (d) interest rates fall. (e) the firm is acquired by a larger firm. 44. The highest average annual (real) return between 1926 and 2000 would have been derived from a portfolio consisting of a representative sampling of: (a) small firm common stocks [“small caps”]. (b) common stocks listed on the Dow-Jones Industrial Index. (c) municipal government bonds. (d) very short term U.S. Treasury bonds [T-bills]. (e) foreign currencies. 45. A decisionmaker who is indifferent between the sure gains and the riskier gains corresponding to point D is: (a) loss averse. (b) definitely rational. (c) risk loving. (d) clearly irrational. (e) risk averse. 46. A decisionmaker who is indifferent between the sure losses and the riskier losses corresponding to point B is: (a) a risk lover [also known as loss averse]. (b) definitely rational. (c) clearly irrational. (d) risk averse. 47. If you were going to buy a new car a major disadvantage of paying for the car by taking out a second mortgage on your home instead of borrowing from a finance company (e.g., GMAC or Ford Financial) is that a second mortgage: (a) usually entails a higher interest rate. (b) will cause a proportional reduction in the value of your property. (c) increases the total liens against your home because your home is the collateral. (d) makes it harder to pay off your first mortgage on an accelerated basis. (e) increases the total amount of tax you pay because property taxes are often based on the total of the mortgages on a home. 48. The speculative [asset] demand for money described by John Maynard Keynes is most closely related to the use of money as a/an: (a) medium of exchange. (b) standard unit of account. (c) measure of value. (d) store of value. (e) standard of deferred payment. 5 49. Transaction costs incurred by a lender who desired to sell would be highest for the money market securities: (a) repos. (b) U.S. Treasury bills. (c) interbank loans through the federal funds market. (d) commercial paper. (e) bankers acceptances. (f) negotiable CDs. (g) Eurodollars. 50. Overnight loans between banks that belong to the Federal Reserve System are transacted through the: (a) required reserves market. (b) excess reserves markets. (c) federal funds market. (d) interbank money market. (e) surplus funds market. 51. When a firm increases the proportion of debt-to-equity in its capital structure, the expected: (a) coefficient of leverage increases logarithmically. (b) return to owners of the firm's common stocks increases because of increased risk. (c) internal rates of return [IRRs] on any new projects decline. (d) rates of return on all of the firm's total assets increase. 52. An auctioneer selling a good solicits the audience for ever higher bids until that moment when no other bidder seems willing to exceed the current top bid in a/an: (a) winner-take-all auction. (b) English auction. (c) Dutch auction. (d) E-Bay auction. (d) surplus auction. 53. The term “creative response” of the financial system refers to adjustments in financial institutions when faced with (a) emerging profit opportunities. (b) globalization of the world economy. (c) laws and regulations that limit opportunities for profits. (d) changes in the credit-worthiness of borrowers. 54. Portfolio structures based on individual investors’ assessments of how consensus views about alternative investments will affect the future values of these assets conform to the model known as the: (a) strategy of rational expectations. (b) a Keynesian beauty contest. (c) value investing approach. (d) theory of strategic market timing. (e) efficient markets model. 55. When a lender refuses to make a loan even though potential borrowers assert willingness to pay the stated interest rate or even a higher rate, the bank is said to engage in: (a) coercive bargaining. (b) strategic holding out. (c) credit rationing. (d) collusive behavior. (e) disintermediation. 56. The advantage of a "buy-and-hold strategy" is that (a) net profits will tend to be higher because there will be fewer brokerage commissions. (b) losses will eventually be eliminated. (c) the longer a stock is held, the higher will be its price. (d) you won’t lose if the stock goes down unless you sell. 57. A loan automatically deposited in your checking account at the financial institution that issued the loan is: (a) backed by new corporate stock. (b) possible only in a 100% reserve banking system. (c) new money. (d) part of M2 but not M1. (e) credit liquidity. 58. The idea that “money is a veil” (neutral) because private firms and individuals rapidly adjust to increases or decreases in the money supply is LEAST consistent with ideas of: (a) classical macroeconomics. (b) the quantity theory of money based on Fisher’s MV=PQ. (c) real business cycle theories. (d) the Cambridge equation that Md = kPQ. (e) Keynesian theory. (f) efficient markets theory. 59. The efficient market hypothesis is most clearly inconsistent with the: (a) performance of investment analysts and mutual funds. (b) random walk behavior of stock prices. (c) January effect. (d) technical analysis of historical asset prices. (e) stock prices after the announcements of positive earning and stock splits. 6 60. FED purchases of government securities on the open market most directly and immediately increase the: (a) discount rate. (b) monetary base. (c) supply of money. (d) market interest rate. (e) unemployment rate. 61. According to the strong version of efficient markets theory, pure economic profit that is predictable is most likely to arise from (a) unsought insider information acquired by chance. (b) careful analyses of corporations’ prospects for net revenue. (c) superior forecasting ability. (d) appropriate diversification of a portfolio. (e) stock options when corporate managers manipulate a firm’s balance sheets and income statements. 62. Money market instruments: (a) include preferred stocks, but not common stocks. (b) are short- term, high-risk, relatively illiquid instruments, and usually are sold in large denominations. (c) include US Treasury bonds after they attain less than one year till maturity. (d) include most financial derivatives. (e) are used extensively by major firms both to warehouse surplus funds temporarily and to raise short-term funds. 63. A firm that temporarily finances a new plant by issuing commercial paper: (a) minimizes the short-term riskiness and costs of rolling over its debt. (b) is more likely to profit if interest rates rise while the plant is being constructed. (c) avoids interest rate risk relative to a firm with similar funding requirements that issues long-term bonds. (d) incurs both the cost of reissuing securities and the risk of having to pay higher interest rates on the new debt. 64. All of the following are evidence against efficient market theories except the: (a) January effect. (b) small firm effect. (c) Fisher effect. (d) high income of Michael Milken when he invented the junk bond market. (e) liquidity (Keynes) effect. 65. If Treasury bonds are issued to cover a federal deficit, interest rates tend to rise because of an increase in: (a) total demands for loanable funds. (b) private demands for more liquid assets. (c) private investment to meet government contracts. (d) profits of the FED from its bond holdings. (e) supplies of loanable funds. 66. Speculative bubbles and financial panics are most consistent with: (a) behavioral finance and Keynesian theory. (b) rational expectations. (c) classical macroeconomics. (d) the weak version of efficient markets theory. (e) the semi-strong version of efficient markets theory. (f) the strong version of efficient markets theory. 67. According to tournament theory, stockholders may benefit if high level corporate executives are paid more than the values of their personal marginal products [VMPs] because: (a) price earnings ratios for blue-chip stocks are quite positively correlated with executive compensation. (b) lower level employees may strive harder to be promoted so that they can capture these economic rents for themselves. (c) the distribution of corporate income will tend to be equalized. (d) salaries paid to corporate executives are tax deductible. 68. After a recession during 1920-1921, the Fed was pressed for operating income. It solved this problem by purchasing income-earning securities, which gave rise to the discovery of: (a) the real bills doctrine. (b) discount window policies. (c) open market operations. (d) lender of last resort status.(e) interest rates pegging. (f) margin requirements. 7 88. The efficient markets hypothesis relies most heavily on concepts encapsulated in the quote: (a) I am the master of my fate; I am the captain of my soul. [Invictus, William Ernest Henley]. (b) “For if the sun breed maggots in a dead dog, being a good kissing carrion … Have you a daughter?” [Hamlet, William Shakespeare]. (c) “No, they did not bury me, though there is a period of time I remember with a shuddering wonder, as of a passage through some inconceivable world that had no hope in it, and no desire.” [Heart of Darkness, Joseph Conrad] (d) “Did she have a precursor? She did, indeed she did.” [Lolita, Vladimir Nabokov]. (e) “O endless information in this universe, you are so great as to overwhelm the lone human mind.” [The Island of Dr. Moreau, H.G. Wells]. (f) “A horse, a horse, my kingdom for a horse!” [Richard III, William Shakespeare]. 89. When Federal Reserve District Banks lower the discount rate, it is untrue that: (a) member banks borrow more from the Fed. (b) the monetary base grows. (c) the actual money multiplier grows. (d) banks reduce their holdings of excess reserves. (e) the money supply grows. (f) leverage on the owners’ equity in commercial banks increases. (g) the potential money multiplier increases. 90. The average investor diversifies most completely and minimizes risk by investing in: (a) blue- chip stocks recommended by a stock broker. (b) indexed mutual funds. (c) junk bonds. (d) Latin American government bonds. (e) corporate debentures. 91. Recent examples of the securitization of assets include the rapid growth of: (a) mortgage backed securities. (b) internet banking. (c) debit cards. (d) household credit card debt. 92. It is untrue that when Michael Milken securitized the junk bond market: (a) the riskiness of financial investments in junk bonds, even if indirectly, was reduced. (b) fewer funds were diverted from conservative economic investments into riskier types of economic investments. (c) interest rates paid by the issuers of junk bonds declined. (d) financial intermediation into risky investments became a more efficient process. (e) Michael Milken’s annual income soared. 93. A Japanese speculator who bought California real estate for $6 million when the yen was trading at 100¥ per dollar and who sold the real estate a year later for $5.8 million after the yen to dollar rate rose to 120¥ per dollar would have: (a) gained from bearing exchange rate risk. (b) broken even in purchasing power expressed in yen. (c) lost roughly 2% on the investment. (d) been better off had the real estate been purchased originally with dollars. (e) lost even more by buying land in Japan. 94. The least homogeneous and standardized, and consequently, the least liquid of the following financial assets would be: (a) futures contracts. (b) investment grade corporate bonds. (c) bankers acceptances. (d) repos. (e) thirty-year U.S. Treasury bonds. (f) commercial paper. (g) T-bills. (h) Eurodollar accounts. (i) pancakes. 95. An investor invariably increases the overall riskiness of an investment portfolio by increasing the: (a) liquidity of the portfolio. (b) percentage of options held in the portfolio. (c) proportion of municipal bonds in the portfolio. (d) leverage of the portfolio. (e) extent of diversification in the portfolio. 96. The idea that a specific amount of deflationary pressure takes significantly longer to yield convergence to equilibrium prices and wages than would comparable inflationary pressure can most directly be illustrated by: (a) relative-cross elasticity equations. (b) a Keynesian-cross diagram. (c) the quantity theory of money. (d) Lerner wage-price reaction functions. (e) present value equations. 10 97. Banks that are members of the Federal Reserve System tend to prefer to borrow from each other when making short-term portfolio adjustments rather than from the FED because (a) the FED’s discount rate is set at punitively high levels. (b) borrowing through the federal funds market is usually less of a hassle. (c) moral hazard is less of a problem for private banks. (d) interstate banking operates on a “buddy” system. (e) competitive deregulation makes state-chartered banks relatively riskier. 98. Eurodollar accounts came into existence in the late 1950s in part because: (a) during the Cold War, the Soviet Union recognized that most of the world treated U.S. dollars as a global medium of exchange, but feared the U.S. government might freeze USSR assets held in American banks. (b) Euro denominated accounts reduced the transactions cost born by U.S. investors who were buying European capital assets. (c) many Western investors used Eurodollars to hedge against the growing power of the Chinese economy. (d) American banks paid higher real rates of interest than were paid by European banks. 99. A key difference between neoclassical and Keynesian macroeconomists is their differing beliefs about the: (a) slope of the aggregate demand curve. (b) speed at which monetary wages and prices adjust. (c) real rate of interest. (d) level of output at which full-employment is achieved. 100. Internal financing for corporations is obtained by: (a) borrowing from banks. (b) selling common stock or bonds. (c) borrowing from stockholders. (d) reinvesting corporate income instead of paying it out as dividends. (e) none of the above. 101. A liquidity (Keynesian) effect associated with a newly adopted contractionary monetary policy will harm a borrower most if a recent mortgage loan is: (a) conventional. (b) 30 years instead of 15. (c) adjustable rate [ARM]. (d) “ballooned” at the end of 8 years. 102. The primary issuers of capital market securities do not include: (a) the Federal Reserve System. (b) the federal government. (c) state governments. (d) corporations. (e) county and other local governments. 103. If the theory that money is neutral in the long run is correct, then: (a) exchange rates are unaffected by the relative growths of the money supplies of different countries. (b) interest rates are the only real economic variable affected by fiscal policy. (c) money illusion may be more significant in the long run than in the short run. (d) changes in the money supply result in proportional increases in the price level, but ultimately do not affect “real” economic variables. 104. If the exchange rate between the dollar and the euro changes from 1.0 to 1.1 euros per dollar, the (a) euro appreciates and the dollar depreciates. (b) dollar accelerates and the euro falls in deficit. (c) euro depreciates and the dollar appreciates. (d) dollar devalues and the euro revalues. 105. A common logical error is for people who buy lottery tickets to view their probability of winning as: (a) higher if they pick numbers themselves than if the numbers are assigned randomly by a machine. (b) lower if the lottery prize has grown significantly because it has not been won in several weeks. (c) the same whether they buy a ticket or not. (d) higher for larger multi-state lotteries than for smaller single in-state lotteries. 106. Potentially harmful effects to exporters or importers from exchange risk can be mitigated by the establishment of: (a) exchange controls. (b) forward markets. (c) prudent macroeconomic policy. (d) a balanced capital account. (e) reserve currency provisions. 11 107. A substantial increase in the national income of a country will cause: (a) its exports to increase dramatically. (b) the country's currency to be revalued upward if a pegged system of exchange rates is in effect. (c) a balance-of-payments surplus under a fixed exchange rate system. (d) devaluation of its currency under a flexible exchange rate system. (e) pressure for the depreciation of the exchange rate of its currency. 108. The Federal Reserve tool that, in the long run, operates by altering the values of both the money multiplier and the monetary base is: (a) discounting operations. (b) Regulation T. (c) open market operations. (d) moral suasion. (e) margin requirements. (f) credit controls. (g) reserve requirements ratios. (h) Regulation Q. 109. Expansionary open market operations reduce the: (a) amount of reserves in the banking system. (b) reserve requirement ratio. (c) actual money multiplier. (d) amount of publicly-held national debt. (e) level of Aggregate Demand. 110. The income velocity of money in Irving Fisher’s equation of exchange is calculated as: (a) nominal money stock/nominal GDP. (b) nominal GDP/nominal money stock. (c) real money stock/real GDP. (d) mc2. 111. Inflation would affect an economy's balance of payments by increasing: (a) exports but decreasing imports. (b) imports but decreasing exports. (c) both exports and imports. (d) capital exports and decreasing imports of consumer goods. (e) real interest rates. 112. A debt contract is more likely to be incentive compatible if (a) the company must follow standard accounting principles. (b) the funds are provided by a venture capital firm. (c) the people who have a controlling interest in the firm have more of their own money in the business. (d) restrictive covenants limit the type of activities that can be undertaken by the borrower. (e) a corporation’s stockholders have significant personal net worth. 113. Tests used to rate the performance of rules developed in technical analysis conclude that technical analysis (a) outperforms the overall market. (b) far outperforms the overall market, suggesting that stockbrokers provide valuable services. (c) does not outperform the overall market. (d) does not outperform the overall market, suggesting that stockbrokers do not provide services of any value. 114. The opportunity cost of holding a given amount of currency decreases when: (a) income decreases. (b) interest rates on bonds decrease. (c) the interest rate on checking-account money increases. (d) wealth decreases. (e) the price level declines. 115. When investors can not distinguish good and bad firms, and therefore offer an average price which undervalues good stocks while overvaluing poor stocks; even though the firms’ managers and owners know the difference and only sell poor stocks at an overvalued price, there is an application to financial markets of the problem summarized as. (a) moral hazard. (b) the public information problem (c) the free-rider problem. (d) the “lemons” model. (e) stock market risk. 116. Huge disparities in compensation that are intended to spur increased diligence on the parts of individuals below the top of the compensation pyramid may be very efficient according to: (a) the inequality effect, as described by researchers in behavioral economics. (b) tournament theory. (c) the game theory matrix known as the loser’s curse. (d) the Pareto paradox. (e) Walras’ law. 117. The term “random walk” is most frequently used to describe a theory of changes in the: (a) direction of the Fed’s policies. (b) savings patterns of households. (c) level of economic investment by corporations. (d) relative prices of stocks. 12 140. The Fed accidentally discovered open market operations when it: (a) came to the rescue of failing banks in the early 1930s and found that its purchases of bank loans injected reserves into the banking system. (b) purchased securities to earn interest income from the US Treasury following the 1920–1921 recession. (c) attempted to slow inflation in 1919 by selling securities and found that its sales drained reserves from the banking system. (d) reinterpreted a key provision of the Federal Reserve Act. 141. Corporate boards of directors may use “tournament theory” concepts to over-compensate executives with the intent of: (a) providing many lower level workers incentives to work hard. (b) finding loop-holes to hide large amounts of taxable profit. (c) create an aggressive feeling towards top industry competitors to increase efficiency and productivity. (d) create a false image to entice potential stockholders to purchase. 142. The most influential participant(s) in the U.S. money market is/are (a) the Federal Reserve. (b) the U.S. Treasury Department. (c) large money center banks. (d) investment banks that underwrite securities. 143. Raising reserve requirements is most likely to: (a) lead to bankruptcy of normally sound banks. (b) lead to liquidity problems for banks with low excess reserves. (c) lead to liquidity problems for banks with high excess reserves. (d) cause a bank panic. 144. Restrictive covenants on bonds are intended to: (a) provide a systemized set of regulations stating when bondholders can cash in their securities. (b) protect the interests of bondholders by limiting the actions of the borrower . (c) protect bondholders from interest rate risk. (d) protect the interests of owners of firms threatened by unlimited liability should the firm fail. (e) minimize the interest rates paid by corporations on outstanding debts. 145. The idea that people or firms that successfully buy goods or sell services [“getting a contract”] through a bidding process are disadvantaged because they probably lack information possessed by unsuccessful bidders is known as: (a) negative returns. (b) the winner’s curse. (c) the loser dilemma. (d) cut-throat losses. (e) animal spirits. 146. People being more likely to ask for a higher price for an asset they already own than they would be willing to pay for the same asset if they did not own it is known as the: (a) tournament effect. (b) winner’s curse effect. (c) endowment effect. (d) buyer’s remorse effect. (e) quid-pro-quo effect. 147. Bonds backed by the cash flow of a particular income-generating project are: (a) coupon bonds. (b) general obligation bonds. (c) municipal bonds. (d) revenue bonds. (e) corporate debentures. 148. Of the following capital market assets, the highest average risk and resulting rate of return is associated with: (a) preferred stock. (b) non-collateralized bonds. (c) junk bonds. (d) municipal bonds. (e) debentures. 149. A foreign exchange intervention by the central bank with an offsetting open market operation that leaves the monetary base unchanged is called a: (a) sterilized foreign exchange. (b) neutralized trade balance. (c) unsterilized foreign exchange. (d) dirty float. 150. Organized exchanges and over-the-counter [OTC] exchanges are important institutions in the: (a) secondary market for commercial paper. (b) primary market for bonds (c) secondary market for capital securities. (d) primary market for capital securities. 15 151. A bank’s percentage rate of return on assets is invariably less than its percentage rate on return on capital (or equity). This is an example of the power of: (a) how government regulation favors regulated industries. (b) financial leverage. (c) how banks reap pure economic profit through financial intermediation. (d) how technological improvements in information processing impose downward pressure on the “spread.” (e) the greater market power of banks when compared to other financial intermediaries. 152. Raising margin requirements might represent an attempt by the Federal Reserve System to reduce: (a) federal budget deficits. (b) stock market speculation. (c) bank profitability. (d) income redistribution. 153. The volatility of interest rates increased dramatically in the 1970s and 1980s, creating a perception of increased interest-rate risk and. (a) causing banks to shift their portfolios from an emphasis on loans to a greater emphasis on stocks. (b) increasing the cost of financial innovation. (c) reducing the range of the different types of business and consumer deposits and funding offered by financial intermediaries. (d) increasing the demand for financial innovation. 154. Monthly payments on a conventional mortgage are: (a) decreased steadily as the amount of the principal owed is reduced. (b) initially heavily weighted as interest payments, and then interest payments decline and retirement of the principal accelerates as more and more fixed monthly payments are made. (c) unamortized. (d) higher the longer the term of the mortgage. 155. The process of transforming otherwise illiquid financial assets into marketable capital market instruments is know as (a) securitization. (b) internationalization. (c) arbitrage. (d) program trading. (e) none of the above. 156. The price of grapes in the US is $100 per bushel and the price of the same grapes in Japan is 10,000 yen per bushel. For the law of one price to hold the exchange rate would have to be: (a) 1,000 yen per dollar. (b) 10 yen per dollar. (c) 100 yen per dollar. (d) 500 yen per dollar. 157. In this figure, if current GDP is $6,000 billion [$6 trillion] and full employment GDP is $10 trillion, and autonomous taxes are then cut by $100 billion [from T0 to T1], this would create a cyclical budget: (a) deficit and a structural surplus. (b) deficit and a balanced structural budget. (c) deficit and a structural deficit. (d) surplus and a structural surplus. 158. If the current tax structure is T0 and potential GDP = $10 trillion but current GDP = $6 trillion, the current budget: (a) and the cyclical and structural budgets are all running deficits. (b) balances, with the structural budget showing a surplus while the cyclical budget is in deficit. (c) is in surplus and the structural and cyclical budgets are both in deficit. (d) and cyclical budgets are in deficit, but the structural budget is in surplus. (e) and cyclical and structural budgets all balance. 16 159. When the Fed purchases a security with an agreement that the seller will buy the security back in a short period, usually 1 to 15 days, the transaction is known as: (a) a matched sale-purchase. (b) a repo. (c) a long sell. (d) an intermediation. (e) a short buy. (f) a noncompetitive auction. (g) interest swap. 160. Most U.S. Treasury bills are sold directly to: (a) pension funds. (b) competitive bidders. (c) the Federal Reserve System. (d) noncompetitive bidders. (e) money market mutual funds. 161. A “piggy-back” mortgage is a single transaction that: (a) requires a cosigner before the mortgage loan is authorized. (b) bundles first and second mortgages, with the second mortgage being used to cover a normal down payment. (c) authorizes the lender to factor the mortgage in a securitized pass-through. (d) provides needed retirement income for elderly homeowners who have accumulated significant home equity. (e) combines a conventional mortgage with an adjustable rate mortgage. 162. Consider a proposal to adopt policies to [1] pay off the national debt; [2] consistently set the federal budget to balance at full employment; and [3] expand the money supply by a small fixed percentage each year. This set of policies would be: (a) incompatible with the recommendations of Milton Friedman, among other modern monetarists. (b) most beneficial to financial investors who desire holdings of US Treasury bonds because of their minimal risk. (c) impossible if international trade continues to expand. (d) widely applauded by Keynesian economists. (e) logically inconsistent in the long run. 163. From roughly 1990 through 2004, the primary policy target of the Fed has been: (a) a fixed rate of monetary growth. (b) zero nominal interest. (c) zero inflation. (d) a 2% inflation rate. (e) the federal funds rate. 164. Major advantages of taking out a second mortgage to fund the purchase of a new car instead of borrowing from a finance company include the fact that interest paid to the finance company is not: (a) deductible when you calculate taxable income. (b) subject to “truth-in-lending” laws. (c) as low, primarily because finance companies often pay kickbacks to reward car dealers for channeling business to them. (d) secured by a lien on your home. 165. If the FED buys $100,000 worth of U.S. bonds from the Junk Dealers Credit Union, which keeps 20% of demand deposits as reserves, the Credit Union could reasonably be expected to quickly: (a) lend $100,000 privately because this merely exchanges a loan to the government for a private loan, with no immediate change in the credit union's liabilities. (b) contract private loans by $80,000. (c) privately lend an additional $20,000. (d) reduce private loans by $100,000. 166. The Treasury sells some T-bills and bonds in a modified uniform-price auction in which noncompetitive bidders: (a) pay the same price as all competitive winning bidders. (b) pay a price which is the highest bid by a winning competitive bidder. (c) all pay a price which is the average of the prices paid by winning competitive bidders. (d) pay a price equal to the lowest bid by a winning competitive bidder. 167. John Kenneth Galbraith’s model predicts an increase in “bezzle” following the financial deregulation that tends to emerge during a period of relative prosperity. This increase in financial fraud can be viewed as an example of: (a) credit rationing. (b) immoral hazard. (c) adaptive expectations. (d) creative response. (e) moral suasion. 17 187. John Stuart Mill developed a theory that long run price level stability does not require governmental action beyond the coining of money, and would automatically be achievable through market forces. His laissez faire theory of the supply of money is based on an assumption that: (a) government deficits and surpluses cancel each other out over the long run. (b) the long run supply curve for gold is roughly a horizontal line. (c) international trade is based on reciprocal demands and supplies. (d) “good money drives out bad.” (e) deflation is a result of “too much money chasing too many goods.” 188. At maturity, a currently available set of securities that pays the greater of face-value or inflation- adjusted principal comprises inflation-indexed: (a) U.S. Treasury bonds. (b) shares of stock in the Federal Reserve System owned by member banks. (c) municipal bonds. (d) corporate bonds. (e) savings accounts. 189. A graph showing a positive relationship between the interest rate and the expected inflation rate would illustrate the: (a) Cambridge equation. (b) Friedman’s liquidity effect. (c) Fisher effect. (d) Laffer curve. 190. Potential operating targets for the Fed would not include: (a) the federal funds rate. (b) the monetary base. (c) the M1 money supply. (d) nominal GDP. (e) the discount rate. 191. Attempts to predict movements in stock prices based on past patterns are, according to the efficient markets theory: (a) a waste of time. (b) profitably employed by all financial analysts. (c) the most efficient rules to employ. (d) consistent with the random walk hypothesis. 192. Surpluses in the federal budget tend to: [a] increase the supply of bonds. [b] reduce current- account surpluses in the U.S balance of international trade. [c] increase the demand for loanable funds. [d] increase the rates of both unemployment and inflation. [e] reduce real interest rates. 193. A bidder is certain to secure the amounts of T-Bills it wants to buy if it: (a) bids more than the average of all bids received by the Treasury. (b) makes a noncompetitive bid for T-bills. (c) structures a “repo” for T-bills that is lower than any other repo offered on the market. (d) bids less than the average of all bids received by the Treasury. 194. Financial leverage tends to increase: (a) the problem for savers posed by moral hazard on the parts of intermediaries who make specific decisions about potential investments. (b) the extent of diversity in a financial portfolio. (b) the willingness of ultimate savers to bear risk. (d) the overall stability of the financial system. (e) people’s internal rates of time discount. 195. The _____ value of a discount bond is the amount that the issuer must pay at maturity. (a) market (b) present (c) face (d) amortized 196. Corporate bonds are more likely to require higher interest rates when issued if they: (a) are convertible. (b) are collateralized. (c) contain call provisions. (d) are issued to finance construction of new plants and equipment. 197. Finance companies raise funds in the money market by selling: (a) commercial paper. (b) federal funds. (c) negotiable certificates of deposit. (d) Eurodollars. (e) securitized short term loans from their borrowers. 198. Call provisions in corporate bonds are most likely to be exercised when interest rates: (a) and bond values rise. (b rise and bond values fall. (c) fall and bond values rise. (d) and bond values fall. 20 199. A basic principle of finance is that the value of any investment is: (a) the present value of all future net cash flows generated by the investment. (b) the undiscounted sum of all future net cash flows generated by the investment. (c) unrelated to the future net cash flows generated by the investment. (d) unrelated to the degree of risk associated with the future net cash flows generated by the investment. 200. According to both efficient markets and Keynesian theories, the markets most likely to adjust quickly in response to supply-side shocks to the economy would be markets for: [a] financial assets. [b] labor. [c] consumer goods. [d] “real” newly-produced economic capital. 201. A macroeconomic reason for the federal government to collect taxes from you is to: [a] keep you from spending it. [b] base taxes on a benefit principle. [c] provide monetary base for the FED’s conduct of expansionary open market operations. [d] avoid deflationary policies. [e] base taxation on an ability-to-pay principle. 202. Levying taxes to cover increases in government outlays is usually: [a] more expansionary than government borrowing. [b] less expansionary than government borrowing or printing money. [c] more expansionary than printing money to cover a deficit. [d] most appropriate during a recession. 203. The enormous federal budget deficits of the 1980s, the early-1990s, and from 2001-2004 have been largely accommodated through: [a]. high inflation rates. [b] large trade deficits. [c] Keynesian policies. [d] low unemployment rates. 204. One major distinction between mortgage markets and the money and capital markets is that the usual borrowers in the money and capital markets are government entities and large businesses, but the usual borrowers in mortgage markets are: (a) small businesses. (b) private individuals. (c) nonprofit entities. (d) government agencies that guarantee mortgages. 205. Another way to state the efficient market condition is that in an efficient market: (a) unexploited profit opportunities will be quickly eliminated very quickly. (b) unexploited profit opportunities will never exist. (c) arbitrage is an extremely noncompetitive process. (d) few financial investors develop expectations rationally. 206. If persistent, huge federal budget deficits were consistently accommodated by FED purchases of U.S. bonds, Milton Friedman and most other monetarists would predict that, in the long run, there would be: [a] disinflation in relative prices, but higher unemployment. [b] lower interest rates and faster economic growth. [c] better job opportunities and less stagflation. [d] increases in the price level, but not in aggregate output. 207. Efficient markets theories are most compatible with: (a) Keynesian beauty contests. (b) the research findings of specialists in behavioral finance. (c) interdependent projections among investors about the profitability of potential investments. (d) precise present value analysis based on the best information available. 208. The function money performs by lowering transactions costs and facilitating specialization is called: [a] store of value. [b] medium of exchange. [c] standard of deferred payment. [d] unit of account. 209. Crowding-out is most likely to be a significant problem when the economy is: [a] in the midst of a deep depression. [b] at full employment but the federal government runs a huge budget deficit. [c] suffering from severe fiscal drag. [d] characterized by a huge structural budget surplus. [e] on the left side of a Laffer curve. 21 210. Ben Bernanke is among many central bankers all over the world who increasingly favor: (a) setting the growth of the money supply at a low fixed percentage rate regardless of short run economic conditions. (b) expanding the money supply at rates that would precisely yield price level stability. (c). pursuing deflationary policies that would reduce nominal interest rates to zero. (d) targeting inflation at a low rate (2% or so) to significantly reduce the risk of deflation. 211. A foundation for both President Reagan’s and President Bush’s tax cuts is the notion that excessively high tax rates reduce taxed behavior (via, e.g., tax evasion and avoidance, and less investment and production) so much that tax revenue may fall. This idea is expressed as the: (a) Phillips curve. (b) Laffer curve. (c) efficient markets theory. (d) liquidity preference theorem. (e) Fisher effect. 212. The amount by which government revenues would be exceeded by government outlays if the economy was at a full employment level of output is known as the: [a] cyclical budget deficit. [b] tax rate-revenue trade-off. [c] structural deficit (or, if negative, the structural budget surplus.) [d] Laffer curve. [e] current account deficit. 213. Irving Fisher explained why interest rates _____as the expected rate of inflation _____ [a] rise; increases. [b] rise; stabilizes. [c] rise; decreases. [d] fall; increases. [e] fall; stabilizes. 214. From the perspective of the borrower, a disadvantage of a second mortgage compared to credit card debt is that: (a) second mortgages are secured by the borrower’s home. (b) borrowers give up the tax deduction on the primary mortgage. (c) borrowers must pay points to get a second mortgage loan. (d) borrowers will find it more difficult to qualify for a second mortgage loan. 215. The budget equation for the federal government can be summarized as [a] ability-to-pay taxes + benefit taxes = total tax revenue. [b] government purchases = government outlays + transfer payments. [c] G = T + change in national debt + change in monetary base. [d] G-T = [S-I] + [M- X]. [e] C + I + G + [X-M] = GDP. 216. According to these Lerner wage-price reaction functions: (a) labor markets adjust to shocks less rapidly than would commodity markets subjected to similar shocks. (b) the Keynesian model of adjustment to declining Aggregate Demand is incorrect. (c) markets are strongly efficient if new information is rapidly converted into equilibrium prices. (d) excess supply yields more rapid price adjustment than does comparable excess demand. (e) commodity markets yield faster quantity adjustments in response to disruptions than do labor markets. 22 233. In the past four months, the yield curve has: [a] “pivoted” upwards, so that relative to short term rates, long term interest rates are now proportionally higher than they were in July. [b] flattened, because investors have become less “bearish,” so they are shifting funds out of “safe” bonds and into somewhat riskier stocks. [c] “pivoted” downward, as anxiety about a deeper and prolonged recession has begun to abate. [d] become more closely synchronized with the Fed’s federal funds target rate. [e] achieved the gentle upwards slope that had been considerably “flattened” by concerns raised following the events of September 11, 2001. [Check for current change] 234. The variable on the x-axis that would be least consistent with standard investment theories would be: [a] illiquidity. [b] time to maturity. [c] risk. [d] diversification. [e] tax rates on returns. 235. If time to maturity is on the horizontal axis of this function, this curve is know as a: [a] yield curve. [b] inverted function. [c] temporal map. [d] temporal risk function. [e] conservation curve. 236. Moral hazard tends to be reduced most for mortgage borrowers by: (a) governmentally-backed mortgage guarantee programs. (b) pre-loan buyer qualification. (c) the lien on the collateral property. (d) large down payments. (e) private home-owners insurance. 237. Federal Reserve independence is widely thought to: (a) introduce a short-term bias to monetary policymaking. (b) lead to better fiscal and monetary policy coordination. (c) introduce longer-run considerations to monetary policymaking. (d) make monetary policymakers more politically accountable. 238. The theory of bureaucratic behavior when applied to the Fed helps to explain why the Fed: (a) is supportive of congressional attempts to limit the central bank’s autonomy. (b) is not secretive about the conduct of future monetary policy. (c) sought less control over banks in the 1980s. (d) is willing to take on powerful groups that may threaten its autonomy. 239. If the Federal Reserve wants to expand reserves in the banking system, it will: (a) purchase government securities. (b) lower the discount rate. (c) sell government securities. (d) raise reserve requirements. 240. The Fed accidentally discovered open market operations in the early: (a) 1920s. (b) 1910s. (c) 1900s. (d) 1890s. 241. A graphical device to illustrate asymmetric wage and price adjustments to excess demands or supplies was first developed by: (a) Arthur Cecil Pigou. (b) Abba Lerner. (c) John Maynard Keynes. (d) Sir John Hicks. (e) Milton Friedman. (f) Myron Scholes. 242. In situations where the asymmetric information problem is not severe: (a) the money markets have a distinct cost advantage over banks in providing short-term funds. (b) banks have a distinct cost advantage over the money markets in providing short-term funds. (c) banks have a comparative advantage over the money markets in providing short-term funds. (d) banks have an absolute advantage over the money markets in providing short-term funds. 25 243. Unlike most money market securities, commercial paper is: (a) not generally traded in a secondary market. (b) usually set with a term to maturity longer than a year. (c) not popular with most money market investors because of the high default risk. (d) more commonly used as a source of funds by European corporations than by American firms. 244. A situation in which the price of an asset differs from its fundamental market value is called (a) an unexploited profit opportunity. (b) a bubble. (c) a correction. (d) a mean reversion. 245. The primary reason that individuals and firms choose to borrow long-term is to reduce the risk that interest rates will (a) rise before they pay off their debt. (b) fall before they pay off their debt. (c) become more volatile before they pay off their debt. (d) become more stable before they pay off their debt. 246. Finance companies play a unique role in money markets by: (a) giving average consumers indirect access to money markets. (b) combining average consumers’ investments to purchase money market securities on their behalf. (c) borrowing in capital markets to finance purchases of money market securities. (d) assisting the government in its sales of U.S. treasury securities. 247. The primary issuers of capital market securities include (a) the federal and local governments. (b) the federal and local governments, and corporations. (c) the federal and local governments, corporations, and financial institutions. (d) local governments and corporations. 248. The distribution of a firm’s capital between debt and equity is its (a) leverage ratio. (b) liability structure. (c) acid ratio. (d) capital structure. 249. Policies that limit the discretion of managers as a way of protecting bondholders’ interests are called (a) restrictive covenants. (b) debentures. (c) sinking funds. (d) bond indentures. 250. Long-term unsecured bonds that are backed only by the general creditworthiness of the issuer are called: (a) junk bonds. (b) callable bonds. (c) convertible bonds. (d) debentures. 251. Preferred stockholders hold a claim on assets that has priority over the claims of: (a) both common stockholders and bondholders. (b) neither common stockholders nor bondholders. (c) common stockholders, but after that of bondholders. (d) bondholders but after that of common stockholders. 252. Securities issued by a given corporation and likely to yield the lowest explicit non-zero interest rate at the time of original issue would be: (a) marginal stock. (b) convertible debentures. (c) common stock. (d) treasury stock. (e) convertible preferred stock. (f) treasury bonds. 253. According to the efficient markets hypothesis, the main cause of fluctuations in stock prices is changes in (a) tax laws. (b) errors in technical stock analysis. (c) daily trading volume in stock markets. (d) information available to investors. (e) total household wealth in the economy. 254. To say that stock prices follow a "random walk" is to argue that stock prices (a) rise, then fall. (b) rise, then fall in a predictable fashion. (c) tend to follow trends. (d) are, for all practical purposes, unpredictable. 255. Which of the following types of information will most likely enable the exploitation of a profit opportunity? (a) Financial analysts' published recommendations. (b) Technical analysis. (c) Hot tips from a stockbroker. (d) Accidentally acquired insider information. 256. Retired people can live on the equity they have in their homes by using a (a) GEM. (b) GPM. (c) SAM. (d) RAM. 26 257. Natural rate theory suggests that if policy makers continually aim for a target interest rate below the natural rate, maintaining the target rate would require: (a) high real interest rates and low nominal interest rates. (b) constant or declining rates of inflation. (c) actual inflation to exceed expected inflation continuously. (d) tariff barriers to prevent competition from cheap labor. 258. The Federal Reserve System's Open Market Committee: (a) includes all seven members of the Board of Governors and the President. (b) conducts the most important parts of monetary policy. (c) has complete control over the financial system. (d) is responsible for fiscal policy. 259. The money supply is negatively related to the: (a) potential money multiplier. (b) margin requirement ratio. (c) actual money multiplier. (d) percentages of excess reserves held by banks. 260. A clause in a bond indenture requiring the firm to pay off a portion of the bond issue each year is a: (a) call provision. (b) nonrestrictive covenant. (c) sinking fund. (d) shelf registration. 261. To minimize the interest and default risks associated with given expected rates of return, relatively unsophisticated individual investors can most reasonably and easily invest in: (a) common stock. (b) diversified mutual funds. (c) corporate bonds. (d) long term municipal bonds. (e) real estate. 262. Banker’s acceptances: (a) cannot be sold until they mature. (b) are issued only by large money center banks. (c) carry high interest rates despite very low default risk. (d) are more liquid than Treasury bills or federal funds. 263. The major suppliers of funds in the US money market include (a) the U.S. Treasury Department. (b) foreign central banks that transact in Eurodollar instruments. (c) mortgage lenders, during periods when interest rates are very low. (d) the FED, when it is attempting to reduce the money supply. (e) major firms seeking to warehouse surplus funds temporarily. 264. Banks usually would prefer to meet deposit outflows by: (a) selling loans instead of selling securities. (b) calling loans instead of selling securities. (c) selling loans instead of borrowing from the Fed. (d) buying securities instead of calling loans. (e) borrowing from the Fed instead of selling loans. 265. Property pledged to the lender in the event that a borrower fails to repay debt is called: (a) points. (b) collateral. (c) interest. (d) good faith money. (e) parsimony. (f) the trust corpus. 266. A reasonable argument in support of a regulated minimum capital requirement for banks is that a bank that holds too little capital: (a) will be more profitable than other banks. (b) imposes costs on other banks because banks with relatively little capital are more likely to fail. (c) have an unfair competitive advantage over savings and loans. (d) is likely to pay lower interest rates to its depositors. 267. A mortgage lender’s right to sell property if the underlying loan defaults is protected by: (a) the down payment. (b) borrower qualification. (c) amortization.. (d) a lien. (e) private mortgage insurance. 268. It is untrue of US Treasury inflation-indexed bonds that (a) the principal amount used to compute the interest payment varies with the consumer price index. (b) the interest payment rises when inflation occurs. (c) the interest rate stated on the face of the bonds rises when inflation occurs. (d) at maturity the securities pay the greater of face-value or inflation-adjusted principal. 27 290. Commercial paper is characterized by (a) non-collateralization. (b) maturity in less than 271 days. (c) issuance primarily by large, well-established and relatively stable corporations. (d) very infrequently sold in a secondary market. (e) All of the above. 291. Advocates of the European monetary union point to the advantages that a single currency has in (a) eliminating the transaction costs involved in having to exchange the currency of one country for the currency of another. (b) speeding the economic disintegration of European countries. (c) allowing member countries to repudiate their government debts. (d) reducing reliance on gold as the major international payments mechanism. 292. Which of the following bank assets is the most liquid? (a) Consumer loans B) Reserves (c) Cash items in process of collection D) U.S. government securities 293. Large-denomination bonds with low default risk and maturity of less than one year are typically traded in (a) money markets. (b) federal funds markets. (c) capital markets. (d) “blue-chip” markets. (e) securitized markets. 294. The evolution of the payments system from barter to precious metals, then to fiat money, then to checks, and increasingly to electronic transfers can best be understood as a consequence of (a) government regulations designed to improve the efficiency of the payments system. (b) competition among firms to make it easier for customers to purchase their products. (c) innovations that reduced the costs of exchanging goods and services. (d) computerization. (e) appropriate central planning. 295. If a US firm is due to be paid in deutsche marks in two months, to hedge against exchange rate risk the firm should (a) sell foreign exchange futures short. (b) buy foreign exchange futures 296. Probably the most significant factor explaining the drastic drop in the number of bank failures since the Great Depression has been (a) the creation of the FDIC. (b) rapid economic growth since 1941. (c) the employment of new procedures by the Federal Reserve. (d) flow of more conservative officials into bank management. (e) relative deregulation of the financial sector since 1981. 297. A bank’s “loan loss reserves” are estimates of the amounts of (a) loans from other banks that will need to be repaid during a given period. (b) outflows of funds expected because of disintermediation. (c) contracts that will require renegotiation because of declines in market rates of interest. (d) assets that will prove uncollectible. (e) records that will be lost in the event of catastrophic computer failure. 298. Interstate branch banking was forbidden by the (a). Glass-Steagall Act (b) Riegle-Neal Act. (c) Community Reinvestment Act. (d) Gram-Leach-Bliley Act. (e) McFadden Act. 299. When drivers are more likely to drive more recklessly because they have insurance against collisions, insurers are faced with negative effects from the (a) moral hazard problem. (b) adverse selection problem. (c) assigned risk problem. (d) queuing problem. (e) personal culpability problem. 300. If a baseball manager conceals information about damage to a former all-star's knees before trading him to another team, the team that receives that player loses because of: (a) malfeasance. (b) immoral hazard. (c) perverse selection. (d) adverse selection. 30 301. The Fed's ability to discourage banks from making too many trips to the discount window is frequently referred to as (a) "arm twisting." (b) the "red dog" rule. (c) "discount blitzing!" (d) "moral suasion." (e) “red-lining”. 302. Before passage of the Gram-Leach-Bliley Act (1999), stringent restrictions in the _______ prohibited commercial banks from acting as investment bankers. (a). Glass-Steagall Act (b) Riegle-Neal Act. (c) Community Reinvestment Act. (d) Competitive Equality in Banking Act. (e) McFadden Act. 303. The ability of the Comptroller of the Currency to charter national banks, in tandem with the ability of states’ banking authorities to charter state banks, created what is known as the (a) Bilateral Banking Commission. (b) dual banking system. (c) creative response solution. (d) Eurodollar market. (e) split banking system. 304. Requirements in some contracts that mortgages be fully paid-off (or refinanced) at the end of, say, 8-10 years, but which permit lower monthly payments in accord with schedules from long term conventional (e.g., 30-year) mortgages, are known as: (a) pay-off escalations. (b) disintermediation clauses. (c) balloon payments. (d) accelerated pay-outs. (e) contraction clauses. 305. The interest rates paid will tend to be lowest on (a) U.S. Treasury bonds. (b) Aaa corporate bonds. (c) IPO securities. (d) high-grade municipal bonds. (e) US Treasury bills. 306. Lenders’ rights and the borrower’s obligations are described in a (a) liability document. (b) bond indenture. (c) Security and Exchange filing. (d) collateral registration. (e) stock certificate. 307. The right of a mortgage holder to repossess property when a borrower defaults is guaranteed by (a) liens against the collateral property. (b) repayment clauses. (c) refinancing provisions. (d) foreclosure agreements. (e) None of the above. 308. The riskiness of a portfolio can be reduced through (a) defenestration. (b) disintermediation. (c) underwriting. (d) diversification. (e) syndication. 309. Transaction costs are reduced when newly-issued stocks or bonds are sold, but competition among financial investors is also significantly lessened, when a corporation secures its financing through a (a) private placement. (b) put-and-call option. (c) initial public offering. (d) financial angel. (e) stock market index fund. 310. Poorer people usually have more difficulty getting loans because they: (a) face consistent policies of price discrimination. (b) typically have little collateral. (c) are inherently less honest. (d) are less likely to benefit from access to financial markets. (e) are characterized by all of the above. 311. Persistent deficits in the current account of payments in the U.S. balance, and the accompanying inflows of international financial capital during the 1980s, were at least partially reflective of: (a) the decreasingly successful collusion of OPEC countries in their thwarted attempts to raise oil prices. (b) losses of virtually all U.S. comparative advantages. (c) persistent federal budget deficits. (d) undervaluation of the dollar in international financial markets. 312. If the dollar depreciates against other currencies in international markets, this will: (a) increase the likelihood of a trade deficit for the United States. (b) make American exports more expensive in other currencies. (c) make American imports more expensive in dollars. (d) increase unemployment in the United States. 31 313. Depreciation of a currency under a system of flexible exchange risk is most like (a) default risk in a corporate bond. (b) devaluation under a fixed exchange rate system. (c) inflation risk. (d) an import quota. (e) a subsidy on exports. 314. Most major American businesses get their external funds primarily from: (a) bank loans. (b) bonds and commercial paper issues. (c) stock issues. (d) retained earnings. (e) savings by foreign households. 315. Which of the following is not one of the eight basic puzzles about financial structure? (a) Large, well-established corporations have superior access to securities markets to finance their activities. (b) Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance, in which businesses raise funds directly from lenders in financial markets. (c) Collateral is a prevalent feature of debt contracts for households, but not business since they have many alternative sources for funds. (d) Banks are the most important source of external funds to finance businesses. 316. Not among the major advantages of market-value accounting over historical-cost accounting would be that market-value accounting: (a) improves the ability of regulators to close a bank before its net worth falls to zero. (b) reduces the incidence in the number of banks that "bet- the- bank" by taking excessive risks in hopes of staying in operation. (c) makes it harder for bank officials to hide insolvencies. (d) makes it harder for regulators and politicians to hide insolvencies. (e) requires fewer resources to acquire data and perform calculations. 317. Mishkin attributes financial crises during the past three decades in countries ranging from the U.S and Mexico to Russia, Norway, Sweden, and Finland to: (a) financial liberalization (e.g., deregulation) that occurred in the 1980s. (b) consistent declines in real interest rates. (c) average inflation that accelerated worldwide in the 1980s. (d) sluggish worldwide economic growth. 318. Pro teams trading superstars to other teams while disguising a player’s drug addiction entails: (a) moral suasion. (b) adverse ignorance. (c) moral hazard. (d) irrational ignorance. (e) adverse selection. 319. Although market trades in international financial markets are said to involve the buying and selling of currencies, most trades involve the buying and selling of: (a) bank deposits denominated in different currencies. (b) SDRs. (c) gold. (d) ECUs. (e) bundles of currencies that have fixed exchange rates. 320. A bank failure is less likely to occur when a bank (a) holds less U.S. government securities. (b) suffers large deposit outflows. (c) holds more excess reserves. (d) has more bank capital. 321. The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in (a) the interest rates of the two countries. (b) the current account balances of the two countries. (c) the price levels of the two countries. (d) monetary policies of the two countries. 322. Which of the following would cause appreciation of the domestic currency? (a) A higher domestic nominal interest rate due to a higher expected inflation rate. (b) A decline in the domestic real interest rate. (c) Slower growth in the domestic money supply. (d) Relatively slow growth of productivity. 323. Commercial banks act as “financial supermarkets” by providing, within a single legal entity, a full range of banking, securities, and insurance services, in a _____ financial system. (a) universal (b) horizontally-integrated (c) barrier-free (d) dividerless (e) severable 32 346. Risk that is related to the uncertainty about interest rate movements is called (a) default risk. (b) interest-rate risk. (c) the problem of moral hazard. (d) security risk. 347. As the number of unrelated stocks in a portfolio is increased, for the portfolio as a whole: (a) unique risk decreases and approaches zero. (b) market risk decreases. (c) unique risk decreases and becomes equal to market risk. (d) Beta increases exponentially as the number of stocks approaches infinity. 348. Economic profits or economic rents that can be capitalized are least likely to arise from: (a) production cost advantages. (b) proprietary knowledge. (c) being first to market a differentiable new product or to innovate a new production technology. (d) a vigorously competitive market environment. 349. The poorest motive for a merger among the following would be: (a) economies of scale. (b) complementary markets and resources. (c) diversification. (d) unused tax shields. (e) synergies [e.g., economies of scope]. 350. Privatization entails the sale of a: (a) government-owned activity to private investors. (b) private company to the government. (c) publicly traded company to private investors. (d) closely-held corporation to private investors. 351. The bubble theory of speculative markets is least compatible with the notion that: (a) investors bid up quickly to levels well above their true value to simply get in on the action. (b) investor behavior is often driven by irrational factors. (c) great losses will occur when prices revert back to prior levels. (d) net present values of expected dividends dominate stock pricing. (e) investors focus primarily on their views of the expectations of other investors. 352. Economic profits that are least likely to result in higher prices for stock held by a firm’s owners, or higher prices for the resources that generate them would be economic profits: (a) derived from the exercise of market (monopoly) power. (b) associated with building an organization especially suited to successful technological innovation. (c) flowing from exclusive licenses to import or export goods whose relative production costs differ greatly between countries. (d) arising from the bearing of risk and uncertainty in a purely competitive market. 353. A risk that is unavoidable for a portfolio of long-term U.S. government bonds that might conceivably be avoided by holding some alternative bundle of assets would be: (a) default risk. (b) revolutionary risk. (c) speculative risk. (d) interest rate risk – the possibility that interest rates will vary. (e) market risk. 354. If Macron Corporation had returns for the past three years, respectively, of -20%, 10%, 40%, then the standard deviation of Macron’s return would be: (a) 10%. (b) 30%. (c) 60%. (d) -10%. 355. Efficient portfolios of assets are the portfolios that generate the: (a) lowest expected rate of return for a given level of risk. (b) highest expected rate of return for a given level of risk. (c) lowest level of diversification for a given expected rate of return. (d) lowest possible market risk. (e) highest possible unique risk. 356. The initial investment in a new suburban mall is expected to be $60 million, and the project is also expected to generate an annual $4 million in after-tax cash flow for five years. At the end of 5 years it can be sold for $80 million. The NPV of the project at a discount rate of 10% would be: (a) $4.85 million. (b) $36 million. (c) $1.3 million. (d) $22.4 million. 35 357. Investing in gold is most like investing in: (a) a stock that pays dividends regularly. (b) physical capital that replicates itself at a fixed annual rate. (c) a stock that pays no dividends. (d) long- term U.S. government bonds. 358. Likely outcomes if a firm uses the same company cost of capital in its evaluations of all projects would be (a) accepting poor low risk projects but rejecting good high risk projects. (b) accepting poor high risk projects but rejecting good low risk projects. (c) accepting both poor low risk projects and good high risk projects. (d) rejecting both good low risk projects and poor high risk projects. 359. Daimler-Benz's acquisition of Chrysler is an example of a: (a) horizontal, cross-border merger (b) vertical domestic merger. (c) conglomerate international merger. (d) vertical cross-border merger. 360. A portfolio with a market Beta identical to the theoretical value of beta would include: (a) only U.S. treasury bills. (b) only long term US Government bonds. (c) an absolutely representative sampling of stocks drawn solely from S&P's composite index. (d) a representative sampling of only common stocks of small firms. (e) an absolutely representative sampling of all possible investment alternatives. 361. The value of most businesses for the purposes of merger or acquisition depends most heavily upon: (a) equipment, machinery, etc. (b) buildings, real estate, etc. (c) patents, licenses, etc. (d) the skills and loyalty of key career employees. (e) market risk. 362. Services are the focus of both Iowa Inc. (II) and Maine Company (MC). Their historical returns for the past three years are: II: -10%,15%, 25%; MC: 10%, 6%, 32%. The covariance between the returns of II and MC is. (a) 252 (0.0252). (b) 103 (0.01333). (c) 155 (0.01555). (d) 319 (0.0139). 363. The respective Betas of the market portfolio and a portfolio of Treasury bills are: (a) Zero and 1. (b) +0.5 and –0.5. (c) 1.0 and zero. (d) +1.0 and –1.0. 364. A financial manager attempting to assess the values of abandoning or expanding an on-going project of her company might usefully use (a) queuing theory. (b) random portfolio selection. (c) a decision tree. (d) matrix analysis. 365. The correlation coefficient between Apostrophe stock and the market portfolio is +0.6. The standard deviation of return of the stock is 30% and that of the market portfolio is 20%. Therefore, the beta of the stock is: (a) 0.9. (b) 1.0. (c) 1.1. (d) 0.6. 366. From the following options, the least scientifically relevant component of project analysis would be: (a) sensitivity analysis. (b) break-even analysis. (c) Monte Carlo simulation. (d) rule-of- thumb estimation of the fudge factor. (e) estimating abandonment and expansion costs. 367. According to the capital asset pricing model. (CAPM), the expected: (a) risk premium on an investment is proportional to its beta. (b) rate of return on an investment is proportional to its beta. (c) rate of return on an investment is totally independent of the risk-free rate of return. (d) risk premium on an investment depends primarily on the risk-free rate of return. 368. Not among three major steps used in Monte Carlo simulations to assess NPV would be: (a) modeling the project. (b) specifying probabilities. (c) modeling the corporate strategy. (d) simulating the cash flows. 36 369. A "factor" in the arbitrage pricing model (APT) is a variable that: (a) affects the return of risky assets in a systematic manner. (b) correlates with risky asset returns in an unsystematic manner. (c) is purely "noise". (d) affects the return of a risky asset in a random manner. 370. If common stock returns are on the Y axis of a graph and market returns are on the X-axis, the slope of the regression line represents the: (a) Alpha. (b) Beta. (c) R-squared. (d) Adjusted beta 371. One drawback of the CAPM is that it: (a) ignores the return on the market portfolio. (b) assumes (requires) a single measure of systematic risk. (c) ignores risk-free return. (d) utilizes too many factors. 372. The hurdle rate for capital budgeting decisions is the cost of: (a) equity. (b) debt. (c) capital. (d) new issuance of stock. 373. Taj Mahal Tour company proposes to invest $3 million in a new tour package. Fixed costs are $1 million per year. The tour package costs $500 and can be sold at $1500 per package to tourists. This tour package is expected to be attractive for the next five years. If the cost of capital is 20%, what is the break-even number of tourists per year? (Ignore taxes, give an approximation.). (a) 2000. (b) 1000. (c) 15000. (d) None of the above. 374. Assumptions that underpin the capital asset pricing model (CAPM) include: (a) returns from alternative investments are totally random. (b) higher fixed costs increase risks for start-ups and reduce abandonment values. (c) homogeneous expectations among investors about income streams from alternative assets. (d) the idea that risk premiums depend on the specific incidence of risk avoidance by each individual investor. 375. The hardest. (and perhaps, most important) part of a Monte Carlo simulation for the NPV of a project would be: (a) simulating the cash flows. (b) specifying numbers on a roulette randomizer. (c) specifying interdependencies among variables. (d) specifying probabilities. (e) identifying appropriate pricing strategies. 376. Not among the three factors in the Three-Factor Model would be a: (a) market factor. (b) size factor. (c) book-to-market factor. (d) risk-to-return factor. 377. For a two-stock portfolio, the maximum reduction in risk occurs when the correlation coefficient between changes in the market values of the two stocks is: (a) +1. (b) zero. (c) –0.5. (d) –1. 378. Diversification will be least economically efficient in reducing a stockholder’s portfolio risk if: (a) unrelated firms merge into huge conglomerates (b) different firms respond to business cycles in very different ways. (c) betas differ substantially among firms. (d) the covariances of firms tend to be highly negative. Section 2: True-False @ 2 points each. 379. For the actual money multiplier to equal the potential money multiplier the banks in the system must be fully loaned up and no currency can be held outside the system. 380. To offset a recession, the FED could raise the legal reserve ratio, raise the discount rate, and sell government securities to commercial banks. 381. Relative to classical theory, John Maynard Keynes emphasized interest as a reward for saving. 37